IMF’s Lagarde says substantial part of global economy better

Perceived risks center on Europe

International Monetary Fund Managing Director Christine Lagarde said that while a “substantial portion” of the global economy appears better now than a year ago, some risks persist.

“Growth continues to strengthen and broaden among the emerging and developing economies,” and momentum is starting to pick up in the U.S., Lagarde said today in remarks at the Boao Forum for Asia, in the southern Chinese province of Hainan.

Lagarde said she was giving a preview of the IMF’s World Economic Outlook report due next week, without providing numbers. The IMF in January cut its 2013 global growth forecast to 3.5 percent and predicted a second year of contraction in the 17- country euro area.

Risks include a “patchy recovery” with concerns that “naturally center on Europe,” Lagarde said. “While there has been progress on a number of fronts, policy solutions will take time to be completed and effective,” she said.

Fiscal risks are also weighing on growth, she said, citing spending cuts in the U.S. and a “medium-term challenge” in Japan. Monetary policies have limits in their effectiveness and may include unintended consequences, Lagarde said, while praising last week’s expanded stimulus from the Bank of Japan as “another welcome step in this direction.”

Cyprus Rescue

After decades of lending to developing economies in crisis, the IMF is now co-funding bailouts for Greece, Portugal and Ireland to help the euro region exit its debt turmoil. The global lender said last week it will contribute about 1 billion euros ($1.3 billion) to a rescue program for Cyprus that Lagarde called “challenging.”

Lagarde said in response to questions after the speech today that Cyprus is “certainly no template of how things of that nature should be resolved.” Cyprus was special in part because of the size of the banking industry compared with the country’s economy, she said.

The euro “has a future, and has a longstanding one,” Lagarde said. “The collective political will to maintain, defend, protect and enhance the monetary and currency zone, has been largely underestimated.”

Collective debt in Europe is “clearly one of the next steps that have to be considered,” she said.

Asian economies have adjusted well to the aftermath of the global financial crisis with “resilient domestic demand’ and capital inflows, Lagarde said. At the same time, some economies have seen financial imbalances and rising asset prices, such as Hong Kong’s property market, she said. Many Asian countries will need to consider when and how to reduce policy support assuming the global recovery stays on track, Lagarde said.

Green Growth

The former French finance minister urged leaders to pursue “green growth that respects environmental sustainability and supports economic sustainability.” Environmental issues “are on the minds of China’s new leadership,” she said.

Lagarde said that China’s government has made some progress in improving monitoring of local-government debt. Other countries have seen financing by regional authorities “bump up significantly public debt,” she said.